Hitting The Ceiling

The nation was forced to the brink a critical crisis, perhaps the most threatening since the Cuban missile crisis in 1962. A small faction in the House of Representatives probably amazed themselves with the potentially destructive power they held. Apparently, they were playing to avoid developing disfavor with their constituents whom they seem to believe elect only those who advocate the most extreme political positions.

Bringing the country to the brink of default brought on formal warnings from the World Bank and the International Monetary Fund, two global organizations in whose founding the U.S. took a leading role. The governments of Japan and China, each a holder of over $1 trillion of U.S. debt also warned. Rating agencies cautioned that the downgrade in Treasury securities brought on by the prior spitting match was likely to be repeated.

The potential harm was severely disproportionate, seemingly even to the selfish interests of these Congressmen, who may have misjudged the impact of their holdout on their Party and their own political futures. Gerrymandering, the redrawing of Congressional district lines to achieve distorted impacts on opposing parties, is a leading culprit in our recent near disaster.

The 2012 election produced 1.4 million more Democratic votes for House seats, yet Republicans won control of the house by a 234 to 201 margin. In five states, the party that won more than half the vote got less than half of the House seats. Distortions are inevitable while gerrymander persists but a solution is available.

California’s division in the House exactly matches its two-party vote, reflecting the efforts of its Citizens Redistricting Commission. This was established through Prop 20 in 2008 when the voters took redistricting away from the sticky hands of its legislators. Similar efforts are needed in most states to effect a more representative democracy.

Stock markets typically anticipate events and U.S. stocks dived at the beginning of trouble and then recovered with signs of a short-term solution. Major new political readjustments in the next few months seem unlikely now and we may face similar crises in 2014. This presents continuing risks to the world’s number one economy and their gravity may encourage bipartisan attempts toward a solution. As Senate Chaplain Barry Black recently prayed, “God save us from self-inflicted wounds.”

While we can hope, we are presently assured only of a three-month truce. Successful investors know that to be a short-term period, encouraging continuing emphasis on stocks in strongly financed growing companies. As the dust settles, Federal Reserve Chairwoman-designate Yellen will doubtlessly need a breathing space before beginning the inevitable “taper” toward higher interest rates. The government shutdown seems to have ended before wounds to the U.S. economy became severe and overall corporate earnings should continue their record growth.

The outlook for selected stocks is thus favorable. Apple (AAPL-$503) continues to defy its critics and should hit $550 by year-end. Chicago Bridge & Iron (CBI-$72) and General Electric (GE-$24) are posting good numbers. I am adding Barnes (B-$36), an undervalued manufacturer of aerospace and industrial equipment.

Among consumer stocks, TJX (TJX-$57) [TJ Maxx] is pushing toward new highs. I am adding Coca-Coal Enterprises (CCE-$41), Coke’s bottler in Europe. In finance, Visa (V-$197) is also nearing new highs as are both BlackRock (BLK-$296) and Blackstone (BX-$27). The healthcare sector is strong and continuing recommendations include Novo-Nordisk (NVO-$173), Amgen (AMGN-$114), and Celgene (CELG-$158). In tech, ARM Holdings (ARMH-$49) and AVG Tech. (AVG-$25) remain buys.

In an effort at perspective, I am reminded of our first debt crisis in 1790 when Alexander Hamilton wanted the new nation to assume the debts of the states. Jefferson and Madison opposed him. The three cut a deal over dinner. The Virginians agreed to the debt assumption while Hamilton reluctantly dropped his demand that Philadelphia be the new capital and agreed to an area to be carved out along the Potomac.

This was about the time my ancestor, Governor Elbridge Gerry, was carving out Congressional districts in Massachusetts with such originality that a political cartoonist gave the Governor’s name to “Gerrymander.” Not the best memorial but he did sign the Declaration.